The importance of strengthening alliances and economic relations between countries that share liberal democratic values has come into sharp focus with Russia’s invasion of Ukraine, and a deterioration of relations with China. Friendshoring, the practice of deliberately building supply chains and engaging in trade amongst liberal democracies, has been touted as a necessary measure to limit the power and influence of increasingly hostile authoritarian states. The economic and political challenge of implementing friendshoring is unfolding simultaneously with the challenge of confronting the threat posed by climate change. The defense of liberal democratic values and the protection of the environment are inextricably linked within the global economy.  

In March 2023, the European Commission President, Ursula von der Leyen, visited Canada. The visit focused on the renewed importance of the partnership between the E.U. and Canada in building net-zero economies through innovation and green technologies. Both President von der Leyen and Prime Minister Trudeau emphasized their desire to strengthen the partnership between the E.U. and Canada as they collectively pursue a net-zero economy. However, effective collaboration between the E.U. and Canada faces challenges.

The U.S. Inflation Reduction Act and the Green Subsidy Race

It is impossible to discuss the state of green economic collaboration without considering the Inflation Reduction Act (IRA). In August of 2022, the U.S. passed the IRA into law. The legislation is expansive, but it notably provides tax incentives and subsidies to American manufacturers of green technology and clean energy. In general, receiving IRA incentives and subsidies is contingent upon the product being manufactured inside the U.S. The objective of these incentives and subsidies is to accelerate the growth of these industries integral to a net-zero economy, and to attract investment dollars to the U.S. The IRA has led to fears from other countries that manufacturers and investment capital will flock to the U.S., stunting the development of green technology sectors in other countries, and preventing the economic benefits of green innovation from being shared globally. 

The IRA has led to calls within Canada and the E.U. alike for similar subsidies and incentives to be adopted, to encourage and protect domestic green technology and energy sectors. These calls for protectionism and associated lobbying can be difficult for policymakers to ignore, and this poses a challenge for European-Canadian collaboration in green technology.   

Current State of the E.U.–Canada Partnership

To understand the path forward to strengthening the E.U.–Canada partnership, it is necessary to first evaluate the current state of economic relations. In 2020, the E.U accounted for 8.2% of Canada’s trade in goods, making it Canada’s third largest trading partner, trailing the U.S. and China. Also in 2020, Canada was the E.U.’s tenth-largest trading partner, accounting for 1.5% of the E.U.’s trade in goods. 

The general framework for E.U.–Canada cooperation is outlined in the Strategic Partnership Agreement (SPA). In the agreement, the E.U. and Canada affirm their commitment to promoting free trade and investment between them to secure mutual advantages. Trade between the E.U. and Canada is governed by the Comprehensive Economic and Trade Agreement (CETA) which provisionally entered into force in 2017. The agreement liberalizes tariffs and reduces trade barriers between the E.U. and Canada, and has resulted in significant increases in E.U.–Canada trade since its entry into force. 

Next Steps for the E.U.–Canada Partnership

Building on the progress that has been made by the CETA by further increasing trade and deepening economic relations between the E.U. and Canada will assure mutual gains in several areas. For instance, Canada’s abundance of critical materials means it is in an ideal position to manufacture batteries for European auto manufacturers producing electric vehicles. This opportunity for partnership has been most recently recognized by Volkswagen, which announced in March of 2023 its plans to build a battery factory in Ontario, Canada. For both parties, especially Canada, trade of this kind will lessen economic dependence on the U.S. as a trading partner. It is prudent to ensure trade is not overly concentrated with one single trading partner, even if this country is an ally, as this makes one vulnerable to unforeseen economic and political changes that might jeopardize the trade relationship. 

The E.U. and Canada are ideal trading partners whose trade relationship should be expanded because of their shared values. The E.U. and Canada have similar labour laws, business regulations and environmental protections in effect. This means that trade and competition advances these shared values. Furthermore, the relative regulatory symmetry between the E.U. and Canada ensures that one does not have unfair advantages over the other within the trade relationship.

While the CETA is provisionally in force, several provisions that govern investor-state dispute settlement and investment protection are still awaiting approval from several national parliaments within Europe before the agreement can fully enter into force. It has never been more important that all the E.U. member states ratify the CETA to ensure effective economic cooperation and international investment can occur in green technology and clean energy. 

The long-term challenge for policy makers in Europe and Canada will be resisting the impulse to adopt policy that mirrors the IRA. A defensive reaction to the IRA from the E.U. or Canada emulating its protectionism through discriminatory incentives and subsidies would be a missed opportunity for deepening the E.U.–Canada long-term strategic partnership, and would run counter to the objectives outlined in the SPA. Building supply chains collaboratively and leveraging Canada and the E.U.’s respective comparative advantages in developing and manufacturing clean technology and clean energy will result in a more efficient green transition that will create mutual gains. Discriminatory subsidies and tax credits that do not privilege the E.U.–Canada partnership will only make the transition more inefficient, expanding corporate profits at a steep cost to the Canadian and European governments.